Shadow and substance of offset promises

The issue of whether SA can afford the R43,8bn arms deal, and its potential to harm the economy and social services delivery, is again high on the political agenda. Its resurgence as a major debating point is due in part to an admission by former senior Finance Department official Roland White that insufficient research was devoted to the methods used to calculate the cost escalation of the deal.

When it was put to him in the public hearing on the arms deal by economist Claude van der Merwe, acting on behalf of the Auditor-General's office, that "no research" had been done into cost-escalation formulas, White suggested the question should have been addressed to the economists who developed the costing model, then added: "But in my view, your opinion is probably a fair one."

That means the actual costs may escalate at a faster rate and to a larger figure than anticipated by the Department of Finance when it presented an affordability study on the deal to Cabinet in August 1999, shortly before government announced its decision to go ahead with the procurement of new, state-of-the-art weapons.

Another item to emerge during the hearing is adding to fears that the decision might have been taken too hastily: testimony that former Defence Minister Joe Modise had signed an agreement to buy three submarines from a German consortium before the affordability study had been done.

Modise's "indecent haste" is referred to in a written submission from Terry Crawford-Browne, chairman of the SA chapter of Economists Allied for Arms Reduction (Ecaar). It relays an earlier allegation, reputedly emanating from "concerned" ANC MPs, that Modise was induced to sign the submarine contract by a R10m payment.

Renewed anxiety over the potential cost of the arms deal should be seen in the context of the grave warnings contained in the affordability document presented to Cabinet. An underlying theme is the steady, seemingly inexorable decline in the rand against the US dollar. Charting the rand's decline from SA's first fully democratic elections in 1994, the study posits an exchange rate of R22,80/ by 2016/2017 and possibly as much as R26/1 in 2018.

Every R1,00 depreciation in the exchange rate will add R2,5bn to the cost of servicing the debt incurred by the arms purchases and R4,8bn to primary repayments, the study notes.

Government has relied heavily on countertrade investments in SA - to which the arms suppliers have committed themselves - to offset the cost of the weapons. It calculates the value of offsets at R104bn (slightly down on the original R110bn) and talks of the creation of 65 000 jobs as a result. The offset "advantages" were used as a major selling point by government when it presented the deal to the public.

But the offsets have met with a great deal of scepticism - from the Auditor-General in his preliminary audit, from the Institute for Democracy in SA, from Ecaar and, most important, from the affordability study. The affordability study notes that the sums involved in the arms deal are extremely large, extend over long periods and that the offsetting of costs through investments from the armaments companies "cannot be guaranteed".

The single most visible offset item on the agenda is the Coega Project. It involves development by mainly private capital of a harbour at Coega, about 20 km from Port Elizabeth, and an industrial zone around it. But the reputed anchor tenant, Germany's Ferrostaal - which was meant to establish a steel mill at Coega as an offset of the submarine deal - has pulled out.

The Coega Development Corp (CDC) still hopes to make the project viable. But, as Colm Allan, who heads the Public Service Accountability Monitor at Rhodes University, has shown, instead of being financed by German, European or even SA private capital, it is being funded by government through Portnet. Far from compensating SA taxpayers for the money spent on arms, it is billing them for the costs of the offset.

There are two further twists to the Coega tale, neither of which is particularly auspicious.

As a private company, the CDC - which is headed by Moss Ngoasheng, immediate past economic adviser to President Thabo Mbeki - is not subject to parliamentary oversight or liable to provide details of its operations under the freedom of information law, even though it is funded from the public purse.

As bad from a corporate governance point of view, a company in which Modise has a significant stake, Khutele Projects, has been awarded contracts by the CDC, thus positioning him to benefit from his indecent haste, if not, as his detractors charge, his acquisitive compulsions.  

With acknowledgment to Patrick Laurence and the Financial Mail.